October 13 – Stocks are cautiously higher on favorable big bank earnings reports, while gains are limited by growing geopolitical risks tied to the Israeli war heading into the weekend. Meanwhile, the broader commodity sector is higher this morning, led by crude oil, as the United States steps up sanctions on Russian energy supplies. The VIX is trading near 17 this morning, while the dollar index is trading near 106.6. Yields on 10-year Treasuries are trading near 4.61%, while yields on 2-year Treasuries are trading near 5.03%. Crude oil prices are nearly 4% higher, while grain and oilseed prices are mostly higher following yesterday’s post-report gains.
Israel warned more than 1 million Palestinians to evacuate areas of north Gaza to the south ahead of an anticipated ground assault on the region, following several days of pounding the region with an air attack that was a response to last weekend’s mass killing spree by Hamas. Israel provided a 24-hour window for 1.1 million people to evacuate an area that it plans to invade, which will be a tall order indeed, but Israel is determined to strike quickly in retaliation to last weekend’s deadly attack. Mass rallies are being planned around the world in response, raising concerns that we could see violence spread to other areas that could impact the markets. That leaves the trade a little uneasy going into a weekend when headlines are expected to continue to flow at a time when the markets are closed. Israel is preparing for the possibility of a long war, which also increases the risks of it spreading into a broader regional conflict. That raises the concerns of commodity traders – especially in the energy sector. The minutes of the latest Federal Reserve policy meeting included concerns expressed by some members about rising commodity prices. Rising tensions in the Middle East do little to ease those concerns, let alone what is happening in the Black Sea war.
Crude oil prices surged today as the United States tightened sanctions on Russian crude oil exports, adding to previous concerns that the escalating Middle East conflict could negatively impact shipments. The U.S. imposed sanctions Thursday on owners of tankers carrying Russian oil priced above the G-7’s price cap. That price cap was set at $60 as the West attempted to limit revenue going to Russia to fund its war on Ukraine, while punishing it for the invasion. Traders fear that the increased sanctions may reduce supplies coming from the world’s second largest exporter of crude oil, leading to tighter global inventories. That comes as OPEC forecasts a drop in crude stockpiles of 3 million barrels per day in the current quarter, assuming that there are no additional reductions resulting from the Middle East conflict. The above provided modest support to corn and soybean prices as well, which are considered to be biofuel commodities.
China’s population is shrinking, and it is impacting policy – both economic and military policy. I’ve previously outlined how China is no longer the world’s most populous nation as it’s population declines below that of India. China’s one-child policy that was thrown out several years back continues to be cultural policy. Officials have not been able to reverse the culture of one child per family. In fact, it’s going the other way. They’re having fewer and fewer children. Official census data within China reports that 9.56 million babies were born in the latest year, the lowest of modern history and down 10% from the previous year. In fact, the number of babies born is down nearly 50% since 2016, with 2023 births expected to drop below 8 million, before recovering to around 10 million in the next few years. This leaves China with a decreasing number of young people to support economic growth as an increasingly large number of the older population move into retirement. Some estimates suggest that nearly half of China’s population could be retirement age or older by 2050, leaving few young people to support them, or the economy. This is a big driver of China’s desire to expand its economic borders via the Belt and Road Initiative that ties other countries to doing business with it via long-term contracts. China currently has BRI contracts with nearly half of the world’s countries. Keep in mind that the declining population is also a driver for China to increase its smart weapons for warfare since the number of young men of fighting age are in decline.
Money flowed broadly into the grain and oilseed sector on Thursday following the release of USDA’s monthly WASDE crop report. The agency cut corn and soybean yield estimates a bit more than expected, while also cutting demand for both as well. However, it also increased crush for soybeans modestly, drawing attention to something that we’ve been telling you – domestic soybean demand will be difficult to ration this year. That leaves projected surplus soybean stocks at a tight 5.3% of usage for the current year, leaving little margin for additional yield cuts. The agency has cut its soybean yield in both the September and October crop reports six times in the past 30 years, following that with another reduction in the November report in five of those six years, with the average decline being 0.5 bushels per acre. That would further tighten supplies, requiring more reductions in exports. Short covering turned into momentum buying by the Algos, with corn and then wheat joining into the positive money flow. Wheat also finds support from Chinese buying that could help tighten its balance sheet a bit more in the months ahead, but corn and wheat are still both amply supplied.
